CAD narrows to 0.2% of GDP

  • June 28, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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CAD narrows to 0.2% of GDP

Subject : Economy

Section: External sector

Key Points:

  • India’s current account deficit (CAD) dropped to 0.2% of GDP in Q4 FY23 from 2 % of GDP in the previous quarter.
  • CAD dipped to $1.3 billion in Q4 FY23 compared to $16.8 billion in Q3 and $13.4 billion in Q4 FY22.
  • The narrowing is due to a moderation in the trade deficit along with robust services exports
    • Trade deficit moderated to $52.6 billion in Q4 FY23 from $71.3 billion in Q3,
    • Services exports have been strong. ($39.1 billion vs. $38.7 billion). This has helped achieve record high service trade surplus.
  • Likely trend ahead and factors:
    • CAD can be expected to further moderate in FY24.
    • Favorable factors are: lower commodity prices, services exports, and robust remittance receipts.
    • At the same time, growth in merchandise exports is likely to be lower on global slowdown along with some effect on services exports.
    • CAD likely to stay in the 1.2-1.6% range.
  • The implication of CAD moderation on value of Rupee is positive. Further there is positive trend on the capital account side too, with FDI and FPI flows ready to pick up. The two trends together indicate a range bound Rupee at the least, along with build up of forex reserves.
Balance of Payment

  • The Current Account and the Capital Account, together determine the balance of payments.
  • The current account records the trade of goods and services of an economy with other countries of the world.
  • The capital account on the other hand records the inflows and outflows of capital that directly affect a nation’s foreign assets and liabilities.

Thus any shortfall on the current account is ideally balanced  by a surplus on capital account (like India) or vice versa (like US). If the two do not balance the adjustment has to come from the forex reserves of the country. But that can only happen in the short term, till a balance is achieved either by appreciation or depreciation of the currency.

CAD narrows to 0.2% of GDP economy